Global steel 2013 A new world, a new strategy
Contents
Executive summary 4
Maintaining value in volatile economic 1 conditions — a look at the year ahead 6
2 Is there value in vertical integration? 10
3 Striving for strategic cost reduction 14
Optimizing capital — maximizing returns 4 for shareholders 18
5 Chinese steel sector 22
Is India on track to become the next 6 steel powerhouse? 30
Other key producer countries 7 outlook 2013 36 Executive summary
“Controlling raw material costs is a benefit of vertical integration; however, steelmakers should critically assess the value of vertical integration and consider possible alternatives to help mitigate the cost of raw materials.” Mike Elliott Global Mining & Metals Leader, Ernst & Young
Global steel — will 2013 be the bottom of the producers need to assess and address whether they are best set trough? up for the new operating environment: • Is there value in vertical integration? Despite a slight increase in demand for steel and the removal of some older steelmaking capacity in 2012, the global percentage • Strategic cost reduction for survival and future growth level of excess capacity is greater now than it was 12 months • The optimal capital structure for the future business model ago due to the continued growth in new steelmaking facilities particularly in developing economies. Is there value in vertical integration?
Capacity utilization rates in the sector remain below 80%, and in In recent years, many steelmakers have integrated raw material 2013 excess capacity will remain the most significant issue in the (coal, iron ore) mines into their supply chains. However, new steel sector. analysis by Ernst & Young suggests that despite the benefits in Growth in global steel demand is unlikely to improve significantly controlling raw material costs, it may not always have a positive in 2013. Sluggish demand combined with excess steelmaking benefit on enterprise value. capacity and ongoing volatility in raw materials costs will Steelmakers should critically assess the value of vertical challenge the sustainability of high-cost producers. integration to their business and consider alternatives to The continued closure of older, higher-cost steelmaking managing raw material costs and supply, such as long-term capacity and increased demand growth should lead to improved contracts with suppliers and relocating production sites closer to profitability for the sector in 2014 and 2015, driven by better upstream suppliers. utilization rates. The closure of inefficient capacity will require the Strategic cost reduction sector to avoid political interference with commercially rational decisions. With continuing weak market conditions, cost reduction activities Restoring sustainable value are essential for steelmakers’ sustainability and future growth. While these activities are necessary, it is crucial that steelmakers Ernst & Young’s 2012 steel report detailed the importance of do not move away from their overall company strategy, thus customer reach, operational agility, cost competitiveness and potentially causing further value erosion. stakeholder confidence for producers to remain profitable. In this report we discuss the different approaches that are These remain priorities for 2013. currently being used to reduce cash operating costs, including: The big challenge for steelmakers in 2013 is how to be cost • Reducing production volumes from loss making plants to competitive while maintaining enterprise value. To achieve this, stabilize steel prices and address oversupply in the market
4 Global steel 2013 Executive summary
• Restructuring labor Is India on track to becoming the next steel • Canceling or reducing supply contracts powerhouse? Optimizing capital Although China is the dominant market in the steel sector, India is increasing its presence in the global steel market as a result of Today’s economic environment is forcing steelmakers to assess domestic steel consumption. The rising middle class population whether their capital structure is optimized for the new operating coupled with increased urbanization will grow steel intensity in the environment. Companies must objectively review the alignment economy. India has seen a rapid rise in production over the past of their asset portfolios to their business strategies. The goal few years, which has resulted in India becoming the fourth largest for companies is the optimal allocation of capital to maximize producer of crude steel and the largest producer of sponge iron in shareholder returns and achieve the most efficient capital the world. structure. As a result, an increasing number of corporate boards are putting greater focus on the key drivers of efficient capital There are many opportunities that are helping grow the Indian allocation. steel market. These opportunities include: This focus is extremely relevant to steelmakers because falling • Rural demand picking up demand and oversupply in regional markets have led to short- • Investment planned in road sector term liquidity challenges that may threaten credit ratings and debt covenants. Capital management today includes: • Indian railway expansion • Building in options • Automobile and power sectors offer opportunity for specialized steel • Capital raising • Refocus on manufacturing • Divesting non-core assets However, there are also some challenges that India must China restructuring overcome in order to continue on the path of becoming the next steel powerhouse. These challenges include: China remains the largest market in the steel sector, even though it experienced lower steel demand, overcapacity, a • Land acquisition and environment regulations fragmented industry and weak profit margins in 2012. The • Shortage of coking coal Chinese government aims to address these challenges through its 12th Five-Year Plan (FYP), which represents China’s goal to • Availability and pricing of domestic iron ore rebalance its economy and shift the focus from investment toward • Downstream value addition consumption and move development from urban areas to rural areas.1 In terms of the steel sector, the 12th FYP focuses on • Insufficient infrastructure and logistics promoting the use of modern technology, energy efficiency and • Overburdened port facilities improved product quality. • Adoption of modern technology Successful execution of the 12th FYP policies will not only help contribute to the domestic and global steel demand, but also promote the production of value-added steel.
1 “China’s rebalancing push needs tailor-made policy,” Shanghai Daily, 20 December 2012, Factiva, http://global.factiva.com/ha/default.aspx.
Global steel 2013 5 01. Maintaining value in volatile economic conditions — a look at the year ahead
Steelmakers are challenged In addition to the adaptation factors raised in Ernst & Young’s by weak global growth; need Global steel 2012: competing for growth in the steel sector, steel producers must also be considering for 2013: for structural change, limited availability of finance and high • The continued appropriateness of the vertically integrated model raw material prices. The existing • The embracing of more flexible cost structures and overall paridigm for steel production reductions does not really work well for this • Optimizing capital structures and allocations new operating environment. As the largest and most dominant market in the steel sector, China continues to surprise, both in its size and dynamism. But as China heads toward its peak, India is picking up the pace and increasing its presence in the global sector. This silent achiever is becoming the market to watch. Ramona Cheng Americas Markets Steel takes its place in the global Leader — China economy Business Network, Ernst & Young The world economy is expected to have grown by 3.3% in 2012 and grow 3.6% in 2013.2 This growth is primarily driven by “As the world’s largest supplier the BRIC nations, with most of this growth coming from China and consumer of steel, China’s and India. They expect to have grown, respectively, at 7.6% structural adjustments and and 5.1% in 2012 and will grow 7.8% and 5.8% in 2013.3 But sustainable transformation in these consolidated growth numbers are less than revealing of its steel sector will have global the underlying uncertainty in the global economy, especially in Europe and the US. The US economy is expected to grow by ramifications.” around 2% in 2012 and 1.8% in 2013.4 The European Union (EU) is expected to decline 0.5% in 2012 and 0.3% in 2013.5
2 IHS Global Insight. 3 IMF. 4 IHS Global Insight. 5 IHS Global Insight.
6 Global steel 2013 Figure 1. Real GDP forecast of major steel-producing countries Figure 2. Global steel capacity utilization 10 95 90 8 85 Emerging� 80 6 75 economies:� % h
t growing faster 70 w 4
ro 65
% g 60 2 55 50 0 Developed� economies:� somber growth -2 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul Oct 2008 Oct 2009 Oct 2010 Oct 2011 Oct 2012 Oct Apr 2008 Apr 2009 Apr 2010 Apr 2011 Apr 2012 Apr 2011 2012e 2013f 2014f 2015f 2016f 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan
US Eurozone Japan China India Source: World Steel Association (utilization data comprises 170 steel-producing Source: IHS Global Insight, Ernst & Young analysis companies) The steel market in 2012 and 2013 Figure 3. Outlook — steel production and consumption 1,000 Sluggish demand growth and range-bound steel prices are 900 predicted in 2013. Steel prices, which had significantly weakened 800 700 in the last few months of 2012, will find support from production 600 cuts and capacity reductions by global steelmakers and near- 500 400 marginal production cost levels for Chinese steel producers. 300 Million tonnes 200 Excess capacity remains the most significant issue in the steel 100 sector. Global steelmakers continue to witness supply growth 0 2010 2011 2012e 2013e outpacing demand, with capacity utilization rates remaining stubbornly below 80%. Slowdown in demand growth from China Worldsteelproduction (excluding China) Worldsteelconsumption (excluding China) China production China consumption and subdued steel prices will continue to weigh on the global India production India consumption steel sector in 2013. The global steel market continues to be Source: Bureau of Resources and Energy, September 2012 oversupplied, and the overproduction versus domestic demand from China is likely to persist as the country’s steel mills are Utilization is not expected to exceed 80% until 2014 and then required to maintain employment and GDP targets. Building and only reach 83% by 2015/16. machinery construction represented the highest demand for steel in China being 57% and 21% respectively.
Global steel 2013 7 Lower industrial production and reduced investment in large- It is unlikely that steel demand will significantly improve in 2013, scale infrastructure projects have resulted in a marked decrease largely because of the continuing economic crisis in developed in the growth of steel demand from both the developed and countries and the structural shift in the Chinese economy. emerging markets. Apparent global steel usage in 2012 is Moderate recovery is only expected in 2014–15, although steel expected to have grown by only 2.1% (compared to 6.2% growth demand is likely to improve faster in emerging markets. We in 2011), and steel demand is expected to grow by only 3.2% in expect by 2015 demand growth to be reaching 3.5%p.a. 2013.6 The most affected region is the Eurozone. With the debt In Ernst & Young’s Global steel 2012: competing for growth in crisis weighing heavily on economic activity, apparent steel use the steel sector, we showed that success in the new economy in the EU is expected to have declined by 5.6% in 2012. Spain and will depend on whether steelmakers can respond to global Italy are expected to see particularly dramatic drops in 2012, challenges. We suggested a focus on four main areas: customer with apparent steel use falling by 11.9% and 12.6%, respectively. reach, operational agility, cost competitiveness and stakeholder Even Germany, the most resilient of European economies, is confidence. In 2013, we look at how steelmakers can become estimated to experience a decline of 4.7% in 2012.7 cost competitive while maintaining enterprise value. Figure 4. Apparent steel use 1600 7
1400 6
408.5 1200 397.5 393.3 5
1000 402.3 4 376.1 800 356.1
3 % growth
Million tonnes 600
2 400 648.8 674.8 623.9 1 200
0 0 2011 2012e 2013f
Source: World Steel Association
6 Short Range Outlook, World Steel Association, 10 November 2012, 7 Short Range Outlook, World Steel Association, October 2012. http://www.worldsteel.org/media-centre/press-releases/2012/worldsteel-short- range-outlook.html.
8 Global steel 2013 Figure 5. Competing for growth framework
Broaden product Prioritize markets offering to compete in Focus on � more profitable Reinforce segments brand Customer reach Speed in adjusting capacity utilization Accelerate � Vertical speed of response integration Use of derivatives
Flexible supply Strategic cost chain reduction Operational Cost � agility competitiveness Master Pass on � innovation cost to customers Improve Optimize collaboration capital
Stakeholder confidence Identify and Re-engage with explain risks internal talent
Enhance Regulatory activity reporting (parallel importing) Outlook Global steelmaking capacity will continue to exceed demand growth in 2013 with excess capacity of 479 million tonnes forecast. As a result, capacity utilization is expected to remain below 80% in 2013 to limit the amount of excess supply in the market. Margins will continue to be tight into 2013 as steel prices will remain flat and costs are unlikely to decrease significantly in 2013. From 2014, the demand outlook will improve modestly resulting in modest increases in capacity utilization and steel prices.
Global steel 2013 9 02.
Is there value in vertical integration?
In recent years, many Steelmakers should critically assess the value of vertical steelmakers have integrated integration to their business and consider alternatives to managing raw material costs and supply, such as hedging raw material mines into their long-term contracts with suppliers and relocating production supply chains. However, new sites closer to upstream suppliers. analysis by Ernst & Young The combination of a weak global economy and slower growth suggests that despite the in China led to a decrease in both iron ore and coking coal prices benefits in controlling raw during much of 2012. Iron ore prices declined by around 35% from highs of almost US$180 per tonne to lows of US$90 per material cost volatility, it may tonne — only to exceed US$150 in early 2013. not always have a positive In the past few years, soaring raw material costs and price benefit on enterprise value. volatility have been major challenges for the steel industry. Steel prices responded more slowly than production costs to these challenges, leading to reduced margins or losses.
Figure 6. Price volatility 900 210 190 800 Carlos Assis 170 700 South America and 150 t t / $ Brazil Mining & Metals M
600 130 / S $ Leader, Ernst & Young U 110 500 “Raw material costs and price 90 400 volatility continue to pose major 70 300 50 1 1 2 2 2 2 1 1 1 1 1 1 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
challenges for the steel sector. 1 t t t r r c c c r b b g n g n g n c c c p p p e e e e e u u u u u u O O O A A F A F D J D J D J A A In response to these challenges, A
many steelmakers have vertically Global —HRC (Black Sea FoB export) (US$/tonne) integrated raw material mines Iron ore price (US$/tonne) into their supply chains; however, Source: CRISIL Research, Ernst & Young analysis there needs to be a balance between cost reduction activity Common wisdom was that by owning a larger proportion of the and conserving/demonstrating production of raw material inputs, overall margins will not suffer. enterprise value.”
10 Global steel 2013 Many steelmakers have continued to integrate raw material months of 2012, two of the top deals were steelmakers vertically mines into their supply chains. This allows steelmakers to integrating into iron ore mines. control supply, cost and quality of raw materials. In the first nine
Figure 7. Steel transactions in the first nine months of 2012
Rank Target Target Acquirer Value ($m) Type Target name Acquirer name Stake (%) Type country commodity country 3,309 Cross-border Roy Hill Holdings Australia Iron ore Posco, Marubeni, STX Corp South Korea, 25 1 Japan 2 2,714 Cross-border Usiminas Brazil Steel The Techint Group Argentina 13.8 1,732 Domestic Anshan Iron & China Steel Pangang Group Steel China 100 3 Steel Grp Corp-Ast Vanadium & Titanium 1,500 Cross-border Tonkolili Iron Ore Sierra Leone Iron ore Shandong Iron & Steel China 25 4 Ltd Group 5 1,201 Domestic Laiwu Steel Corp China Steel Jinan Iron & Steel Co Ltd China 100
Source: Thomson One
Ernst & Young research on the top 30 steelmakers by market positive correlation between the integration of raw materials capitalization over the last three years shows that there is a and increased profitability.
Figure 8. EBITDA margins versus raw material self-sufficiency, 2009–11 60%
50% JSPL
40% CSN gin r 30% CAP ating ma r NLMK Severstal 20% ChinaSteel JSW Steel MMK Erdemir Ternium Mechel age ope SAIL r Baoshan Evraz e POSCO Gerdau v HyundaiSteel JFE Usiminas A 10% Voestalpine Wuhan Angang Tata Steel Baotou Pangang ArcelorMittal Nucor Hebei Nippon Thyssenkrupp 0% US Steel
-10% 0 2 4 6 8 10 12
Raw materialself-sufficiency index*
Source: Ernst & Young analysis, S&P Capital IQ and VTB Capital * The raw material self sufficiency index was calculated by assigning a figure on a scale of 1-5 based on the extent of a steelmaker’s ownership for each iron ore and metallurgical coal thus giving a figure out of 10. 0 = no vertical integration 10 = fully self-suffficient in iron ore and metallurgical coal
Global steel 2013 11 However, to gain the most benefit from vertical integration, • The decision needs to be made to be an exclusive internal steel companies must have extensive knowledge and experience supplier or to sell to the external markets. Transfer pricing in each step of the iron ore and metallurgical coal exploration, issues for internal-focused suppliers and sales teams for dual production and distribution processes. Steelmakers need to providers are pivotal issues. consider the following challenges: But there is still a question as to whether vertical integration • Substantial capital investment is required to set up a mine. creates enterprise value. For example, the differences between mining and steelmaking may create concerns regarding the • New iron ore and coal mine sites are increasingly in riskier allocation of risk. Mining is a high risk, high return business, locations that also require significant infrastructure investment, where metals production is moderate risk and moderate return. such as Liberia, Guinea, Mongolia and Mozambique. This is evident when looking at the lack of increase in value when • Steelmakers need to compete with miners for skilled labor. steelmakers integrate higher-risk mining businesses into their value chains. In addition to the risks associated with mining, • Operational efficiencies in the areas of IT and management KPI vertically integrated steelmakers may not feel as pressured to dashboards are needed to correctly measure the performance implement radical cost management to protect margins if they of the mining division versus the performance of the steel are accessing raw material cash flows from their mines. division.
Figure 9. Average EV/EBITDA versus raw material self-sufficiency, 2009–11 30.0 CAP Baotou 25.0 Nucor
20.0 A 2009–11 A D 15.0 ChinaSteel /EBIT
V Erdemir E HyundaiSteel age US Steel r 10.0 Usiminas e Thyssenkrupp Panzhihua Gerdau Mechel v Wuhan A NLMK AngangSteel HebeiSteel Tata Steel JSPL NipponSteel JSW Steel ArcelorMittal Baoshan POSCO CSN MMK Severstal 5.0 Evraz Voestalpine JFE Holdings Ternium SAIL
0.0 0 2 4 6 8 10 12
Raw materialself-sufficiency index
Source: Ernst & Young analysis, S&P Capital IQ and VTB Capital
12 Global steel 2013 With these considerations in mind, an analysis of the enterprise It’s important to remember that steelmakers have viable value of the top 30 steelmakers over the last three years alternatives to legally owning the mining business for vertically shows that vertical integration has either no effect or a slightly integrating raw materials into their supply chains. These include: negative effect on the valuations of steelmaking companies. • Adopting commodity price hedging to address raw material (See Figure 8 above.) price volatility But this discount in value may also be due to how information is • Relocation of production sites closer to the upstream suppliers disclosed to the market. If the information on mining is disclosed as a standalone business, then there may be less discount in • Long-term contracts with suppliers (e.g., iron ore, coking coke) value. In 2011, ArcelorMittal created a separate mining business. for security of supply This strategy created a strong business able to undertake In addition, steelmakers may still decide to vertically integrate but premium mining acquisitions. Output from mines that could be reduce their risk by capping their level of shareholding in mining sold outside the group are now transferred internally at market operations. For example, US steelmaker AK Steel is limiting its prices. Production from “captive mines” (limited by logistics investment in coal mining to 50% of its current annual needs. The or quality) continues to be transferred at cost-plus to the steel company’s goal is to keep ramping up its coal production, but AK facilities.8 Steel will make the decision based on the coal price in 2013 and Vertical integration by steel into mining also brings in the risks of 2014. If prices continue to decline, however, the company has the the mining business. In fact, much of the value creation potential flexibility to stop expanding in coal.9 may remain unrealized due to: Steelmakers also can implement other cost reduction initiatives • Alignment of mining output to the needs of steel business, or seek cost synergies through mergers and acquisitions thereby not realizing the full potential of market opportunities (M&A). For example, the new merged entity of Nippon Steel and in pure mining business Sumitomo Metal Co. has streamlined production facilities in an effort to save US$1.9b annually three years after integration.10 • Deployment of sub-optimal technology, competency and skills in the mining activity due to split focus vis-à-vis a leading practice competitive miner — thus having a negative impact on the cost curve and sustainability factors
8 “Building a world class mining business,” ArcelorMittal, 23 September 2011. 9 Based on an Ernst & Young interview with Roger Newport, Vice President Finance and Chief Financial Officer, AK Steel. 10 “Nippon Steel & Sumitomo to push cost cuts amid competition,” Bloomberg, 1 October 2012. Implication While this analysis does cast some doubt on the perceived value creation of the vertically integrated model it does not invalidate it. What is the more important output from this hypothesis is that vertically integrated steelmakers should be critically assessing their business models to ascertain whether current structures provide optimum value. Ernst & Young has a valuation team that can assist steelmakers in this strategic assessment.
Global steel 2013 13 03.
Striving for strategic cost reduction
Weak market conditions mean The approaches currently being used to reduce cash operating that cost reduction activities costs include: are necessary to help position • Reducing production volumes from loss making plants to steelmakers for survival and stabilize steel prices and address oversupply in the market position for future growth. • Restructuring labor However, steel companies • Canceling or reducing supply contracts need to ensure that cost-cutting Reducing production volumes activities do not deviate from the organization’s overall Steelmakers with overcapacity need to restructure by eliminating outdated capacity. In 2012, an estimated surplus of 56 million strategy and will not cause tonnes of steel existed, despite recent mothballing of capacity.11 further value erosion. Producers have retained loss-making excess capacity in the hope of either a large increase in demand or more likely the provision of economic assistance from host governments. Fiscal austerity has restricted government’s ability to ponder to this rent-seeking behavior but has not altered the political will to defend job losses and protect icons of domestic manufacturing. The recent actions by French politicians regarding the proposed closure of part of Angie Beifus the Florange steel plant. The politicization of otherwise rational Global Coordinating commercial decisions can only negatively impact the recovery Analyst — Mining & of the entire global steel sector by delaying the removal of Metals, Ernst & Young ineffective loss making excess capacity. Thus far, some 50 million “Companies need to be aware tonnes of crude steel capacity has been removed from the global market (excluding China) — 30 million tonnes in Europe alone. of the risk and implications of Steelmakers have also largely kept steel capacity utilization restructuring labor decisions. between 75% and 85% since October 2009, thereby keeping steel Labor in the steel sector consists prices weak. largely of multi-skilled workers, In addition to careful capacity management, steel companies technicians, engineers and are focusing on asset management, asset utilization, process managers, and the demand for efficiency, yield and rework (quality of product) and other cost a highly skilled workforce is only expected to increase.”
11 Resources and Energy Quarterly, BREE, September 2012.
14 Global steel 2013 drivers. The key advantage of concentrating on these areas is In an environment of low capacity utilization, steel producers are that it is an effectively costless process. Some examples of this revisiting their optimization models. Strategies include focusing renewed focus include: on value-added products despite challenges of higher setup times and smaller production campaigns, as the opportunity cost • Asset management. As production volumes decrease, astute of lost time is negligible due to low capacity utilization. operators are adapting their maintenance strategies to reflect the reduced utilization of both fixed plant and mobile Restructuring labor equipment. Reducing the frequency of planned maintenance activities can significantly lower the cost of planned Labor can be a huge cost advantage and productivity factor. maintenance. The more flexible an operation to scheduling Capital substitution for labor can make steel production more maintenance the more option value that is created from being economical. Producers in developed countries often have higher able to perform maintenance at times of falling prices and defer labor costs, so controlling those expenses can reduce a huge cost it at times of rising prices. disadvantage.13 • Asset utilization and optimization. Some operators are The US steel sector has undergone massive restructuring for reducing operating costs by optimizing the equipment that is survival. Labor productivity in the US has seen a fivefold increase being used. For example, a processing plant that can mothball since the 1980s, going from an average of 10.1 workhours per higher-cost areas. While this may reduce the plant’s overall finished ton to an average of 2 hours per finished ton by 2010. recovery rate, it increases the cash operating margin. For Many US steel plants are producing a ton of finished steel in less example, ArcelorMittal is focusing on its core assets to achieve than one workhour.14 the lowest cost footprint possible, along with significant savings. Developing countries, such as China has often developed As part of this program, ArcelorMittal is closing the liquid phase their cost advantage on the back of low labor costs. As those of its Liège plant in Belgium.12 economies develop, employment costs will naturally increase • Process efficiency. Operators are focusing on the efficiency and greater capital substitution will be necessary to remain cost of process inputs so that only minimal costs are incurred in competitive. producing their outputs. A reduction in staffing significantly lowers operating costs — less • Yield and quality. While process efficiency is focused on one-off payments for redundancy or layoff packages where improving how process inputs are used, yield and quality applicable. In South Korea, for example, steelmakers have initiatives focus on improving the outputs of the process. They implemented retrenchment policies throughout 2012 as a way to renew the focus on yield from production processes, effectively minimize costs. They are expected to continue to do so in 2013.15 getting more finished product for the same unit cost. Improving And the immediate drop in salary costs may flow into additional the quality of the outputs also lowers costs by reducing rework savings in IT support, floor space and travel. and scrap material.
12 ArcelorMittal presentation to the Dahlman Rose & Co. Third Annual Global 13 EU Paper on the cost effectiveness of the EU steel sector (2008, p. 49). Metals, Mining & Materials Conference, 14 November 2012. 14 American Iron and Steel Industry. 15 “2013 steel & non-ferrous outlook,” Tongyang Securities, 29 November 2012.
Global steel 2013 15 However, companies need to be aware of the risk implications of Canceling or renegotiating supply these decisions. Labor in the steel industry consists of a large proportion of multi-skilled workers, technicians, engineers and contracts managers. And the skills and knowledge requirements in the Service contracts are probably one of the easiest cost sector are only expected to increase, as will the demand for a components for companies to renegotiate, cancel or reduce in highly skilled workforce. Overall, the steel industry faces a similar line with production decreases. Such action will lead to rapid and 16 skills shortage as other industries, such as mining. In some significant reduction in operating costs, except where contracts countries, particularly in Europe, the average age in the sector have a “take-or-pay” component or penalty for early termination. is quite high, and as workers retire the skills shortage may grow worse. Companies need to correctly manage downsizing with their contractors to make sure they have future access to equipment Companies are also at risk of losing organizational knowledge and supplies from these companies and to avoid negative legal and skills, and potentially intellectual property, with departing ramifications. Companies should also strive to maintain a good staff. Additionally, by retrenching staff, companies run the risk relationship with their service contractors to avoid a future of diminishing their staff loyalty and goodwill and could find reduction in service and support. Doing so is critical as contract it harder to recruit and retain staff for the next growth cycle. equipment often provides useful surge capacity for operations, Unless processes are made more efficient or total workload but much of the sector is looking to its supplies to share some of is reduced, it is likely that more expensive contractors or the pain of restructure. temporary labor will be needed in the longer term to back-fill vacated positions. To counter these issues, some companies are Other initiatives that steel companies may choose to minimize implementing other staff cost reduction exercises, including: supply costs are: • Placing employees on paid leave • Centralizing procurement and control • Reducing shifts • Renegotiating or consolidating contracts • “Freezing” or reducing salaries • Building strategic sourcing arrangements • Transferring flexible skill sets across sites Strategic sourcing is a supplier relationship management process that leverages enterprise expenditure with a select number of qualified suppliers. If done properly, it can reduce operational expenditures and lead to lower product costs.
16 EU Paper on the cost effectiveness of the EU steel sector (2008, p. vi).
16 Global steel 2013 Key implications • Prepare well in advance for the political discussions to close loss-making plants/capacity • Don’t rely on the continuation of government assistance to prop up unviable operations • Focus on the productivity of both labor and capital in future labor cost environments • Preserve key skills • While broader economic activity is subdued, act to have contractors and suppliers take part of the pain
Global steel 2013 17 04. Optimizing capital — maximizing returns for shareholders
Today’s economic climate is Consequently, a growing number of corporate boards are forcing steelmakers to candidly focusing greater attention on the key drivers of efficient capital allocation. For example, companies are under pressure to inject assess the appropriateness greater discipline into their organizations in terms of operational of their capital structure. efficiency. This includes a focus on identifying opportunities for More than a mere review of releasing excess cash and optimizing working capital. operations, companies must This focus is particularly relevant for steelmakers because falling objectively assess the alignment demand and oversupply in regional markets have led to short- term liquidity challenges and may threaten credit ratings and of their funding and asset debt covenants. The challenge for steel companies is to remain portfolios to their business true to their long-term strategy while making capital allocation strategies. The goal: the optimal decisions and build in the flexibility to respond to short-term allocation of capital to maximize opportunities and risks. shareholder returns and achieve Building in options the most efficient capital The companies that deliver the best returns are those with a structure. proactive and active capital reallocation strategy — those with the flexibility to reallocate capital across business units according to relative market or strategic opportunities.17 This could be the reallocation of investment from a high-cost/low-return business to one that can realize better returns now or in the future, or the phasing and prioritization of capital expenditure to reduce capital intensity and free up future growth options. Bob Stall Steel production is a capital-intensive business. Investments such Partner, as vertically integrating mines, building new plants, maintaining Mining & Metals, old plants and pursuing potential acquisitions need to be funded. Ernst & Young US In 2010, capital expenditure of the top 30 steelmakers by market “Many mining and metals capitalization increased by 15% as compared to 2009. In 2011, companies have undertaken however, there was very little increase in capital expenditure strategic investment/divestment (only 2%) as compared to 2010.18 This is to be expected given plans and are continuing to seek the right balance to optimize their capital structure and maximize their return to investors.”
17 “How to put your money where your strategy is,” McKinsey Quarterly, March 2012. 18 Ernst & Young research on Standard & Poor’s Capital IQ data.
18 Global steel 2013 the weak economic conditions and excess capacity in the The real problem of high gearing has been masked by the record market. A number of steelmakers have announced a reduction in low real interest rates being incurred on debt at the moment. capital expenditure in 2012–13. For example, Usiminas noted its However, highly geared steelmakers are not well positioned intention to decrease its capital expenditure in steel in 2013. In to handle the ultimate increase in interest rates and may well July the company announced plans to reduce its capex plan from continue the pattern of credit downgrades. The January 2013 R$2.5b to R$2b reals in 2012.19 announcement by ArcelorMittal that it would repay $3.5bn in debt through the issue of shares and convertible notes is part of The need to increase productivity may require new capex for a general move we expect to see repeated across the sector. long term survival and value protection The refining businesses in the oil and gas sector have gone Capital raising through a similar restructuring of their balance sheets over the last decade and the top 20 refining businesses by market The debt/equity structures of many sector participants represent capitalization had an average debt to equity ratio of 55% in 2011. a capital structure for the way the world used to be not how it Ernst & Young’s hypothesis is that those producers with debt to will be. In an environment of increased risk, entrenched excess equity ratios above 55% are likely to be over geared subject to capacity, thin margins, greater volatility and changing business unique circumstances. models, it appears imprudent for the sector to be carrying the debt load that it is. In 2011 the top 20 steelmakers had an Similarly, companies need to build options and flexibility into average debt to equity ratio of 88%. their approaches to capital raising. Some have done so on a huge
Figure 11. Top 20 steelmakers total debt-equity ratio 2011
360% 340% 320% 1 180% 201 o
i 160% t a r
y 140% t i
qu 120% e o- t
t- 100% Top 20 steelmakers Average 88% b e
D 80% 60% Top 20 oil and gas refining and marketing verage55% 40% 20% 0% CSN CAP SAIL JSPL Evraz NLMK Nucor Gerdau POSCO Usiminas Severstal Tata Steel China Steel Hyudai Steel Nippon Steel JFE Holdings ArcelorMittal ThyssenKrupp Baoshan Iron & Steel Inner Mongolia Baotou Inner
Source: Ernst & Young analysis; S&P Capital IQ
19 “Vale follows steelmakers cuts on supply glut,” Bloomberg, 5 October 2012.
Global steel 2013 19 scale in the bond markets, but the capital-raising environment Figure 12. Proceeds of issues by steelmakers by asset class in 2012 can be volatile. In 2012, global annual mining and metals capital- compared to the same period of 2011 raising activity is set to decline for the first year since 2009, with Rank 2011 US$ 2012 US$ Change % a fall in proceeds in all asset classes except bonds in the first nine months of 2012. The 37% fall in year-over-year (y-o-y) proceeds IPOs 383 172 -123% to US$174b reflects a combination of challenging eguity markets Follow- 13,561 2,856 -375% and a significant withdrawal globally from the commercial loans ons (equity) market. Convertibles 459 163 -181% Similarly, companies need to build options and flexibility into Bonds 30,418 22,877 -33% their approaches to capital raising. Some have done so on a huge Loans 53,571 19,662 -172% scale in the bond markets, but the capital-raising environment Total 98,392 45,730 -115% can be volatile. In 2012, global annual mining and metals capital- raising activity is set to decline for the first year since 2009, with Source: Ernst & Young, Thomson One a fall in proceeds in all asset classes except bonds in the first nine months of 2012. The 37% fall in year-over-year (y-o-y) proceeds Divesting non-core assets to US$174b reflects a combination of challenging eguity markets and a significant withdrawal globally from the commercial loans Capital management today requires companies to look beyond market. Companies need to be prepared for rapidly changing the pure financials. They need to fully assess the operational, scenarios with a range of options and flexibility on the balance reputational, environmental and political risks when considering sheet. In addition, companies need to maintain their credit rating where to allocate resources. Projects or business units must earn quality. If a company’s credit ratings are downgraded, it can have their right to stay in the portfolio. a significant impact on the cost of borrowing and the ability to An essential element of capital reallocation is the process of access capital on the best terms. ArcelorMittal, for example, divesting assets that may be underperforming, inefficient, high indicated that it would be further reducing its debt in 2012 as a cost or simply no longer in line with the company’s strategy. It is ratings downgrade would cost the company about US$100m a also a means of reducing debt and maintaining credit ratings. year in interest payments.20 For example, ArcelorMittal company plans to reduce its capital During 2012, steelmakers raised significantly less capital as expenditure in 2013 (down from US$4.5b to US$4b). In compared to 2011. Steelmakers raised US$45.7b in 147 issues addition, ArcelorMittal is deleveraging through its asset disposal in 2012 as compared to US$98.4b in 269 issues in 2011. During program, making asset sales of US$2.7b since September 2011. 2012 debt finance accounted for 93% of capital raised in the steel ThyssenKrupp is also seeking value maximization through a net sector, with 61 loans worth US$19.7b and an additional 62 bond debt reduction encompassing the sale of Steel Americas and issues worth US$22.9b the focus on materials and logistics services and capital goods The largest single deal in 2012 was ArcelorMittal’s bond issue of business.21 nearly US$3b issued to reduce indebtedness. More companies are adopting an active approach to managing their portfolio of business assets. Greater rigor can help identify instances of inefficient capital deployment and help assess alternatives. Moreover, earlier identification of problem areas leads to both better capital preservation and more optimal allocation.
20 “ArcelorMittal’s debt cut to junk by S&P on steel weakness,” Bloomberg, 21 ThyssenKrupp press release, 10 December 2012. 3 August 2012.
20 Global steel 2013 Global steel 2013 21 05.
Chinese steel sector
The Chinese steel sector faced The Chinese government aims to address these issues, and strong challenges in 2012 as others such as increased energy cuts, increased labor costs to stimulate domestic production and decreased raw material it grappled with lower steel availability, through its 12th FYP. demand, overcapacity, a China announced a target plan of 7% GDP growth during the fragmented industry and weak 12th FYP period and is aiming to develop stable economic profit margins. growth alongside a structural change in the economy.22 In terms of steel, the plan focuses on promoting the use of modern technology, energy efficiency and improvement in product quality.
Figure 13. Focus points for the 12th FYP
Reduction in energy use Peter Markey China Mining & Metals Leader, Ernst & Young “The largest and most influential
market in the steel sector is Upg China — it is the market that r ading oduction
moves both global steel demand r and supply.” 12th FYP eel p eel t t echnology s focus points wn in o d w o Sl
Value-added steel
Source: Ernst & Young analysis
22 “China’s premier says 7.5 pct GDP target not low,” Xinhuanet, 14 March 2012.
22 Global steel 2013 In 2012, Chinese GDP growth stabilized at around 7.5%.23 As Figure 15. China demand-supply balance a result, fixed investment, particularly in construction, has Year 2006 2007 2008 2009 2010 2011 2012* declined. The effect on steel demand is clear from the Purchasing Managers Index (PMI) for April–September 2012, which shows Production 422 488 498 566 637 683 702 the month-on-month contraction in steel demand during the (million course of 2012. tonnes) Consumption 388 436 453 559 611 650 663 Figure 14. China steel headline PMI for April-September 2012 (million tonnes) 60 55.7 Oversupply 34 52 45 7 26 33 39 55 (million 49.2 h
t 50 tonnes) w
o 44.5 r 48.8 g 45 43.5
% 39.9 * Estimate 40 Source: China Steel Sector, Deutsche Bank, 18 October 2012, via Thomson One 35 Apr–12 May–12 Jun–12 Jul–12 Aug–12 Sep–12 The 12th FYP is expected to restrict capacity expansion at the bottom of the value chain, with the Chinese government seeking China steel headline PMI for April–September 2012 increased M&A among smaller steel companies. The government China steel production PMI for April–September 2012 is aiming to increase the share of top 10 steel manufacturers Source: China Steel, Nomura Research, 3 October 2012, via Thomson One from 48% in 2010 to 60% in 2015.25 Its intention is to achieve economies of scale, be more energy-efficient and have better Overcapacity remains a concern with excess steel production bargaining power with raw material suppliers. A consolidated over the last decade at 31% of apparent consumption. Steel steel industry will also have a positive effect on global steel demand in China is expected to grow only by around 2% y-o-y markets as greater competitiveness and therefore production in 2012.24 However with a lot of new infrastructure projects25 discipline will gradually solve the problem of overcapacity. approved in the second half of 2012, steel demand in China is expected to moderately increase by 3.1% in 2013.26 A more consolidated steel sector will also enable the Chinese government to implement policy initiatives such as those related to production efficiency, energy efficiency or improvement in steel quality. Currently, smaller steel mills are more likely to use outdated technology and are in operation primarily because of the strong demand for construction-grade steel products. In terms of the government’s energy usage initiative, smaller steelmakers have been unaffected by the strict energy restrictions levied on larger players.26
23 IHS Global Insight. 25 2012 Steel Industry Outlook, BOCI Research, 1 February 2012, via Thomson One. 24 Steel insights: China unlikely to provide a near-term catalyst, Morgan Stanley, 20 26 “Assessment of China’s Energy-Saving and Emission-Reduction Accomplishments May 2012, Thomson One. and Opportunities During the 11 th Five Year Plan,” The Energy Analysis and 25 Steel: Better in 2013, but is that good enough?, CIMB, ISI Emerging, 5 December Environmental Impacts Department, http://eaei.lbl.gov/sites/all/files/EP_11FYP_ 2012 Accomplishments_Assessment.April_.2011_1.pdf 27 worldsteel Short Range Outlook, World Steel Association website, http://www. worldsteel.org/media-centre/press-releases/2012/worldsteel-short-range- outlook.html, accessed 1 January 2013
Global steel 2013 23 The 12th FYP also focuses on the adoption of new, more efficient “Economy of scale and enhanced technology” is the new mantra steelmaking technologies to help reduce environmental pollution for any major project starting up in Asia. Two Asian players, and increase the sector’s overall productivity. China currently Tata Steel29 and RINL,30 have recently completed their brownfield has around 2,700 mills. Most of these are very small mills,27 expansion by installing one of the largest furnaces in the with capacities below 1 million tonnes per annum, producing area — its 3,500m3 capacity will allow the steelmakers to enjoy commodity-grade steel with obsolete technology. an economy of scale. Similarly, China has already approved mega-expansion projects for Baosteel (~10 million tonnes) and During the 11th FYP, China did not make significant progress in Wuhan Iron and Steel (Group) Corporation (WISCO) reducing the use of obsolete technology; however, the country’s (~9.2 million tonnes) that are expected to use the latest steel sector has increased its adoption of new technologies to technologies in the companies’ new plants. Approval for improve the efficiency of its new plants. Large Chinese players these new expansion projects is also conditional on outdated such as Baosteel and others have entered in collaboration with capacity being removed from the market. By the time Baosteel’s global steelmakers such as ArcelorMittal and Nippon Steel,28 Zhanjiang project is operational, the local government in among others, to adopt the latest technologies and gain current Guangdong will have closed 16.4 million tonnes of outdated technical know-how. For example, Chinese steelmakers are technology being removed from the market.31 looking to adopt new technologies such as Corex, Finex and ITmk3 to reduce the dependency on metallurgical coal for Globally, there are concerns that smaller players in the Chinese future projects. steel sector will have a negative impact on the global steel market. With their profitability remaining the lowest globally, it Figure 16. Steelmakers investing in Chinese steel technology is possible that Chinese companies will continue to operate even Foreign Country Chinese Investment after posting losses, flooding the steel export markets with steelmaker partner low-cost steel. Nippon Steel Japan Baosteel Galvanized steel There has been some positive policy development in China NV Bekaert SA Belgium Xinyu Iron 50% stake; where state banks have been less inclined to continue to lend and Steel advanced coating to loss making businesses. This policy shift has accelerated the Precision US Yangzhou 49% stake; consolidation occurring in the sector. Castparts Chengde large-diameter, Adding to the lack of profitability is a significant increase in Steel Tube interconnect pipe production costs, including: labor costs (which will result in a loss for coal-fired power of competitive advantage over time), energy costs, and domestic plants raw materials. ArcelorMittal Luxembourg Hunan Valin 18.99% stake; Iron and steel technology, Steel Group procurement and marketing
Source: mergermarket; Baosteel company website
In addition, a number of Chinese steelmakers now have the technology to compete with Japanese manufacturers in relation to the production of high-quality steel products.
27 “For China, Too Much Steel Isn’t Enough,” Bloomberg Businessweek, 29 “Expansion Initiatives: India,” Tata Steel company website, 28 June 2012. www.tatasteel.com/investors/annual-report-2010-11/html/expansion-initiatives- 28 Deals, mergermarket, accessed 6 December 2012. india.html, accessed 6 December 2012. 30 “RINL spending Rs 19k cr on Visakhapatnam steel plant expansion,” 4 January 2012. 31 “China approves Baosteel’s $11b steel project in Guangdong,” Reuters, 25 May 2012.
24 Global steel 2013 Figure 17. EBIDTA margin comparison of steel companies 2011 China has been exporting steel to almost every region in the globe — Asia, Africa, Americas, Europe and Middle East. The 20.00 18.37 country’s growth model has been to invest in infrastructure to 15.70 create demand and jobs. When Chinese domestic demand is low, 15.00 11.11 domestic steel mills exports to other markets. Steelmakers in the % 10.00 importing regions have been at the receiving end of this trend as 6.51 5.20 they are often unable to compete with government-subsidized 5.00 2.20 cheap Chinese steel. 0.00 Increased exports from Chinese companies will increase China South Korea Japan Brazil India Russia competition for global steelmakers for export markets. Europe and the Middle East are an important steel export market for Source: S&P Capital IQ; Ernst & Young research steelmakers from the Commonwealth of Independent States Exports from China will continue to have an impact on global (CIS) as well as China. Asian countries other than China account producers. Although China is the world’s largest exporter of for almost two-thirds of all Japanese steel exports. This region is steel,32 its steel exports accounted for only 6.4% of the country’s also the largest Chinese export market. Steelmakers from these total annual steel production in 2011.33 Exports of steel from regions would face much competition from Chinese steelmakers China to other steel-producing countries such as Brazil and the as the latter find domestic demand stagnating and look for US impose a ceiling on domestic prices.34 The effect on domestic export markets. For example, exports accounted for almost 35% prices in other steel-producing countries will depend, however, of Severstal’s revenues in 2011, 23% of which came from Europe 35 on the types of steel being exported from China. and the Middle East. Exports account for 40% of POSCO’s total sales, 26% of Hyundai Steel’s and 49% of Hyundai Hysco’s.36 Figure 18. Chinese steel trade 35
30 28.3 28.8 26.5 24.8 25 23.6
20 18.5
15.3
Million tonnes 14.3 15 12.7 13.2 13.2 11.8 11.6 9.1 10 5.5 5 1.6 1.5 1.7 1.9 1.8
0 2007 2008 2009 2010 2011
Export of long products Export of flat products Import of long products Import of flat products
Source: World Steel Association
32 ISSB Ltd. 35 Annual report 2011, Severstal. 33 Steel Statistical Yearbook 2012, World Steel Association, October 2012. 36 “Structural downturn,” Mirae Asset Securities via Thomson Research, 34 LatAm Metals & Mining, Deutsche Bank, 5 September 2012. 22 October 2012.
Global steel 2013 25 The level of competition would also depend on the type of There have been some concerns that Chinese steel use intensity steel produced and exported by the respective steelmaker. For may peak in the near- to midterm. However, this is unlikely as the example, steelmakers from CIS have a larger share of basic grade rebalanced objectives of the 12th FYP, combined with a high rate steel in their steel production mix and would directly compete of urbanization, will contribute to steel demand. For example, the with the Chinese steelmakers as compared to the Japanese FYP includes a number of planned projects that would contribute or European steelmakers, which have a larger share of value to increased steel demand, and many of the western and central added steel in their product mix.37 For example, Severstal’s main regions of China are still in the early stages of the steel intensity contributors to export sales volumes were hot-rolled strip and curve. Planned projects include: plate products (48.6% of total steel products).38 • 36 million apartments by 2015 Figure 19. China’s steel exports (2011) • New urban rail system in 20 cities and expansion of high-speed network 30 25.3 • 83,000km of new highway, 150,000km of oil and natural gas 25 pipeline, and 8 new airports 15 Figure 20. China’s steel imports (2011) 10
Million tonnes 10 5 5.1 4.3 4.3 2.7 9 2.4 1.7 0.9 0.9 0.4 8 7.6 0 6.8 7
CIS 6 Other Other Africa Japan 5 NAFTA Europe EU (27) EU Oceania America 4 Other Asia Middle East
Million tonnes 3 Source: World Steel Association 2 1.2 1 0.6 A further decline in China’s domestic steel demand will make the 0 export trade more pronounced. China exported about 48 million EU Japan tonnes of steel in 2011, more than 50% of which was to other Others Asian countries. Some of the largest steel importers in Asia are Other Asia South Korea (also a significant exporter), Thailand, Vietnam, Source: World Steel Association Indonesia and India. China has massive steelmaking capacity, so Steel intensity in China may peak much more quickly than in the even minor increases in its export patterns have the ability to US or the UK. The US reached its steel industry peak in about dramatically alter the steel industry in other countries. According 75 years, but China is expected to peak in 23 years at current to Sajjan Jindal, Chief Executive, JSW Steel, if China exports growth rates. Of course, the peak of steel consumption per just about 10mtpa to India, “the Indian steel industry could be capita is subjective for every country. Although it is difficult crushed.”39 to pinpoint the correct level for China, the US and Japan offer Increased concern from importing countries regarding the probable benchmarks from the peak of their investment cycle: dumping of excess inventory into their market may lead to approximately 600kg and 700kg per capita, respectively. Once increasing trade disputes. Tata Steel in Thailand has asked the steel intensity peaks in China — estimates are that this will government to impose anti-dumping duties on steel wire from happen in approximately 2020 — there will be a gradual decline in China.40 Chinese steel production and consumption.
37 “China flooding globe with cheap steel,” The Globe and Mail, 14 September 2012. 38 Annual report 2011, Severstal. 39 “Steel producers fear rising China exports,” FT.com, 18 October 2012. 40 “Tata urges anti-dumping penalties on Chinese steel,” The Nation, 28 September 2012.
26 Global steel 2013 Figure 21. Steel consumption per capita Outlook
Peak Despite a slowdown in the economy, steel production in China 700 Lower has grown moderately during 2012. The production capacity growth utilization of Chinese steelmakers has steadily declined from 600 Maturity 84% in 2009 to around 78% in 2012, with steel inventory rising 500 China High 1997 83kg steadily after a sharp decline in 2009. In the short term, steel growth 2007 316kg Stability oversupply is likely to persist as total steel output growth will
g 400 k 2011 460kg 2020 ~ 600kg outpace total steel consumption growth. Chinese steel prices, 300 India which are trading near the lows of 2008, are likely to find 2011 57kg 200 2020 ~ 100kg support from the fact that these prices are near the cash cost levels of Chinese steelmakers. However, a short-term upside in 100 Start prices is also unlikely, considering the predictions of sluggish 0 demand in 2013. Although steel production in China will
Source: World Steel Association, IMF, CIA World Factbook, Ernst & Young Metals & Mining decelerate due to slowdown in end-user demand, it is unlikely analysis to fall from current levels as the steel sector remains one of the country’s largest contributors to GDP and jobs.41 A successful implementation of the 12th FYP policy initiatives would not only help contribute to steel demand, both domestically and globally, but it would also promote the production of value-added steel. For example, the machinery, power plant projects (such as stainless steel) and high-speed railway would require specialty steel. And as Chinese steelmakers consolidate and improve their product mix with a focus on higher- value products, they will have the opportunity to become more cost-effective producers. If the sector follows the lead of the US steel industry in terms of labor (1 workhour per tonne), it is likely that China could have a huge cost advantage in higher-value steel products in the global market.
Pierre Mangers, Executive Director, Mining & Metals, Ernst & Young Luxembourg “China‘s steel use is likely to peak in 2020. Other geographic areas cannot offset due to their size, their growth or often both.”
41 “Structural downturn,” Mirae Asset Securities, 22 October 2012, via Thomson One.
Global steel 2013 27 Q&A Q: Putting aside the current economic volatility and Q&A with Michael Wang, uncertainty, what do you see as major challenges in the steel sector? What are you doing to meet these challenges? President, WISCO Canada A: The steel industry is facing the following key challenges: Company Limited, • Global steel overcapacity a subsidiary of Wuhan • Lower profit margin • Fragmented steel sector in China, coupled with some structural Iron & Steel (Group) issues in product mix To address these major challenges, the steel sector in China Corporation (WISCO) needs to: 1. Eliminate outdated and excess production capacity. China’s Ramona Cheng, Ernst & Young Ministry of Industry and Information Technology set a target in April 2012 to eliminate outdated (obsolete) capacity whereby Americas Markets Leader, China 10 million tonnes per year of outdated puddling capacity and 7.8 million tonnes per year of outdated steelmaking capacity Business Network, interviewed will be phased out in 2012. Various measures have been taken Michael Wang, President of to achieve this target, such as putting a halt on production, shutting down certain production facilities, and consolidating WISCO Canada Company Limited, or converting those with outdated capacity to more energy- efficient, environment-friendly capacity. on 19 November 2012. 2. Reduce transportation/logistics costs by moving some of the production from inland to coastal areas. [Logistics/ transportation costs currently account for 11.2% of the total operational costs among all steel companies in China.42] 3. Build a stable raw materials supply globally — for example, WISCO has locked in 40 billion tonnes of iron ore [reserves] globally through its joint ventures. WISCO’s overseas investments are currently producing about 10 million tonnes of iron ore annually, and WISCO’s target is 60 million tonnes per year in the future.
42 “Steel capacity to be curbed,” Global Times, 18 June 2012, Factiva.
28 Global steel 2013 The quality and consistency of raw materials and the stability demand. of supplies have been highlighted as key strategic objectives for Q: Prices of iron ore and coal have decreased during the steel companies with integrated operations, where the ability to course of this year. How will this raw material pricing trend secure supply notwithstanding pricing volatility and economic impact steel prices, and consequently, what will be the uncertainty is of mutual benefit to steel companies as well as outlook for steel margins? their joint venture partners [i.e., suppliers of raw materials]. A: The recent developments in prices and margins are Q: Do you think China is entering a new phase of slower inevitable — the downward adjustments in raw material prices are economic growth or merely pausing for breath? required to bring the profit margins [of iron ore and metallurgical A: China is now in the new phase of urbanization. In the past coal producers] down to a more reasonable level. The significant 30 years, China’s rapid economic growth has brought half profit opportunities in both mining and steelmaking in the past of its population from rural areas to urban areas. In 2011, had attracted a broad range of investors who built significant China’s urbanization rate exceeded 50.5%.43 Based on research production capacity that could not be fully released — such conducted by the Institute for Urban and Environmental “imbalance” in turn drove down profits, margins and raw material Studies Chinese Academy of Social Sciences, once a country’s prices. [WISCO is of the view that the current margins for raw urbanization has passed the 50% turning point, its economy will materials are approaching a reasonable level after the demand- grow at a relatively steady and stable growth rate. Over the next supply adjustments that have taken place in iron ore and 20 years, it is projected that China would bring an additional coking coal.] 300 million people into cities, thereby generating potential Q: What do you think is the outlook for the steel industry in significant opportunities in areas such as labor, construction and the next three years (to 2015)? infrastructure, transport, energy, water, etc. Urbanization will continue to drive economic growth. Accordingly, we anticipate A: In the next three years, as the global steel industry further that China will grow at a steady pace. The steel sector, after a consolidates, the relationship between steel production capacity period of shake-up, is expected to grow at a rate corresponding and market demand will be adjusted to reach a better balance. with the growth of the overall economy in the long run. As a result, costs and product mix are expected to be further improved for the sector. Q: Among the top 12 steel deals year to date in 2012, about half have been Chinese domestic consolidation. What will an China is expected to continue moving up the value chain in increasingly consolidated (and potentially more efficient) manufacturing (i.e., upgrading manufacturing capability) with Chinese steel sector have on the global steel sector? further urbanization. And the steel industry is expected to keep pace with the growing economy, albeit at a slower yet steady A: The steel industry in China is very fragmented. A highly and stable pace during the rebalancing period. While the current consolidated steel industry is crucial to China’s competitiveness adjustment period could be painful, the steel sector will remain in the global steel sector. We anticipate the M&A activity in China a “backbone” industry of the economy with its long-term growth will be increasingly active and intensified in the next few years commensurate with that of the overall economy. in order to adjust production capacity to a reasonable level as well as to result in a product mix that will better reflect market
43 Population of urban and rural areas and percentage urban, 2011. United Nations, Department of Economic and Social Affairs, http://esa.un.org/unpd/wup/CD- ROM/Urban-Rural-Population.htm, accessed on 18 December 2012.
Global steel 2013 29 06. Is India on track to become the next steel powerhouse?
India’s steel industry has grown The 301 memoranda of understanding (MOUs) signed with about 10% per year, from various states, when implemented, would theoretically boost planned capacity to about 489 million tonnes.44 27 million tonnes in 2001 to 72 million tonnes in 2011. The growth in India’s industry is a result of domestic steel consumption, which has been driven primarily by infrastructure- According to the Planning related investments and consumer durables. The 12th FYP Commission of India, the projects an investment of US$1t in infrastructure alone, which country’s steel production is will accelerate steel consumption. As an estimate, this increase in infrastructure spends may itself lead to additional demand of expected to grow by around 60 approximately 40 million tonnes per annum during 2012–13 to million tonnes during the 12th 2016–17. 45 FYP (2011–12 to 2016–17). Figure 22. Projected infrastructure investment during the 12th FYP
1,200
1,000
800
600 INR billion Anjani Agrawal 400 India Mining & Metals 200 Leader, Ernst & Young 0 “India’s domestic steel FY11–12 FY12–13 FY13–14 FY14–15 FY15–16 FY16–17 consumption will continue to grow Source: Committee on Infrastructure/Planning Commission steadily for several years into future — driven by urbanization, favorable demography, GDP growth, refocus on industrialization and stepped-up investments in infrastructure. The current challenges, while posing constraints on supply side, do offer opportunities for players both local and global.”
44 Annual report 2011–12, Ministry of Steel. 45 “Report of the working group on steel industry” for the 12th FYP (2012–17).
30 Global steel 2013 The rising middle-class population, along with increased Opportunities urbanization, will increase steel intensity in the economy. According to the report of the working group on steel industry for In line with GDP growth, Indian steel demand has immense the 12th FYP, the Indian urban population is expected to increase opportunities to grow across sectors in the mid- to long term. to 600 million by 2030 from the current level of 400 million. The rapid rise in production over the last few years has resulted The rising middle-class urban population boosts demand for in India becoming the fourth largest producer of crude steel automobiles, white goods and other consumer durables leading and the largest producer of sponge iron or direct-reduced iron to higher per capita steel consumption. (DRI) in the world. The country has the opportunity of becoming the second largest producer of steel by 2015,47 and per capita Indian steel consumption growth has an elasticity of about 1.1 consumption of steel in India, which is only 55kg (2011) — 46 to growth in GDP. In other words, if the Indian economy grows significantly lower than global averages — suggests potential to at 7% per year, steel demand is likely to grow by 7.7% during the close the gap in future. Some of the primary levers of demand same time, from the current 68 million tonnes to around growth are summarized below: 132 million tonnes by 2020. Rural demand is picking up Figure 23. Projected steel demand in 2020 Currently, per capita rural consumption in India stands at
160 around 13kg. This is significantly lower than urban per capita consumption. Projects like Bharat Nirman and Rajiv Gandhi 140 Awaas Yojana have led to increased demand for construction 120 steel like thermo-mechanically treated (TMT) bars and galvanized
100 plain and corrugated (GP/GC) sheets, but there remains a significant opportunity to grow rural steel demand by widening 80 the distribution network and by providing customized solutions
Million tonnes 60 catering to the needs of 70% of the population.
40 Investment planned in road sector 20 The 11th FYP (FY07–12) registered a road investment worth 0 US$66b, which is a rise of more than 100% in comparison to GDP growth at 7.0% GDP growth at 8.0% the 10th FYP (FY02–07). Going further, an investment worth US$132b has been planned for the 12th FYP. The government has launched many road investment programs, namely the Source: Ernst & Young analysis National Highways Development Project (NHDP) and Pradhan Note: assumed steel demand growth to GDP growth elasticity of 1.1 Mantri Gram Sadak Yojana (PMGSY), to increase the connectivity of roads to ports and plant sites.48
46 Institute for Steel Development and Growth, 47 Annual Report 2011–12, Ministry of Steel, India. www.iim-delhi.com/upload.../02Steel_Growth_Scenario_INSDAG.pdf, 48 National Highway Authority of India accessed on 6 December 2012.
Global steel 2013 31 Indian Railways — a key contributor to steel demand affected overall investment in infrastructure and steel projects. in the country Indeed, most of the steel MOUs signed in prior years remain as Indian Railways has an ambitious investment plan to invest plans, with projects not started due to delays on environmental US$328b through 2020 under its ‘Vision 2020’ program. and forest clearance, land acquisition, mining leases and other Vision 2020 plans massive capacity augmentation to meet regulatory issues. traffic demand and improve safety and operational efficiency. The organization’s plan is to invest around US$42.6b out of Land acquisition and environment regulations the total allocated budget in laying down new lines. Freight Setting up a steel plant requires vast tracts of land. For car procurement is also expected to increase to 75,000 per example, POSCO’s proposed steel mill in Odisha would require annum from the present level of 15,000 per annum. Many of the around 1,600 hectares,50 and ArcelorMittal’s proposed plant in investments will have high steel intensity. Indian Railways’ ability Karnataka would require around 2,800 hectares.51 Acquiring to meet Vision 2020’s target holds the key to steel demand these vast tracts of land for setting up mega-plants, particularly during the current decade.49 in a populous country like India, has remained a challenge with steelmakers. Major greenfield steel projects such as those of Automobile and power sectors offer opportunity POSCO, ArcelorMittal and Tata Steel have been delayed for for specialized steel a number of years, primarily due to land acquisition issues. The increase in volume by the automobile majors will drive the Rules to calculate adequate compensation to the landowners demand for specialized steel such as ultra fine grain steel and have been unclear.52 Additionally, the number of approvals dual phase steel. The demand for cold rolled grain oriented like environmental and forest clearances required from the steel (CRGO), which is currently imported, offers a valuable authorities has made land acquisition and setting up projects the opportunity. As India is currently short of electricity, there are top issues in building up large new capacity. plans to exponentially increase investment in power projects, which will also drive steel demand. Shortage of coking coal India is very dependent on imported coking coal. Approximately Refocus on manufacturing 60% to 65% of the domestic coking coal requirements are met The government’s plan to re-energize manufacturing will lead through imports53 due to unavailability of appropriate qualities to accelerated demand from the capital goods sector and in the country. Coking coal reserves available in the country projects. The current share of capital goods in the overall steel have high ash content and are not suitable for the steel industry. consumption is substantially lower than China’s, even in Planned increases in steel production capacity are likely to be ratio terms. blast furnaces, so the requirements for coking coal will increase. In 2012, India imported around 31 million tonnes54 coking coal, Challenges and that amount is expected to rise above 41 million tonnes by 2015.55 High dependence on imports further makes the domestic India’s GDP growth has dropped from more than 9% in early steelmakers’ profitability dependent on the international coking 2010 to below 6% for three successive quarters in 2012. Slowing coal prices. GDP growth and concerns around economic policy-making have
49 Vision 2020, Ministry of Railways, December 2009. 50 “Q+A — India confronts land grabs in industrialisation push,” Reuters, 19 August 2010. 51 “ArcelorMittal says ‘some progress’ in Karnataka steel plant,” The Indian Express, 28 April 2012. 52 “In Bastar, Tata Steel discovers a ‘land’ mine after troubled acquisition,” Business Standard, 11 July 2012. 53 “India to acquire coking coal mine in Mongolia,” The Hindu, 10 May 2012. 54 “Coal imports jump 18 pct y/y in first half of FY13,” Reuters, 23 October 2012. 55 “Ready for bounce-back,” BNP Paribas via Thomson Research, 14 June 2012.
32 Global steel 2013 Figure 24. Investments required to achieve forecasted increase Downstream value addition in capacity There is a recent but growing trend observed toward resource 140 nationalism. Several iron ore-producing states like Odisha have 120 professed a policy for preference in allotment/renewals of mining 100 leases to actual users — thereby making downstream processing and steelmaking a condition. This has posed severe challenges to 80 merchant miners and disruptions to the current state. However, 60
Million tonnes given this stance of the local governments, global and local steel 40 industry players can hope to get mines allotted for captive use, 20 which has been a major deterrent for most steel multinational 0 corporations so far. FY 2011–12 FY 2016–17
Source: Planning Commission Insufficient infrastructure and logistics
Note: additional investment needs are based on Planning Commission’s forecast of 60 million The steel industry is a major user of infrastructure resources tonnes of steelmaking capacity additions under the 12th FYP. like railways, roads and ports. Every 1 tonne of steel produced involves approximately 4 tonnes of material movement across Availability and pricing of domestic iron ore India. A growth in steel production will increase the burden of the The availability of inexpensive, good-quality iron ore is one of country’s already stretched logistics infrastructure. To meet the the positive factors for growth of India’s domestic steel industry. needs of a growing steel industry, major improvements in various However, the sector has more recently come under the scrutiny infrastructure facilities are required. of authorities due to widespread illegal mining. As a result, the state of Karnataka faced a ban on iron ore mining on 2011. Figure 26. Infrastructure in China and India The ban affected domestic steelmakers’ annual production, 4.6 4.4 4.4 4.5 with JSW Steel operating at less than 30% capacity at one 56 3.9 point. Shortage of iron ore due to mining bans in key iron ore- 3.4 producing states such as Karnataka, Goa and Odisha has also led to a rise in domestic iron ore-prices that is in contrast to a falling trend in export iron ore prices; this also is creating disturbances in the supply chain. There is little to no expectation of Indian iron ore exports during 2013.
Figure 25. Forecasted coking coal demand and import needs 70 Quality of� Quality of railroad� Quality of port� roads infrastructure infrastructure 60 50 Source: The Global Competitiveness Report 2011–12, World Economic Forum 40 Note: indicators are ranked on a scale of 1 to 7, with 7 being the most desirable outcome. 30 20 10 0 2011 2012 2013 2014 2015
Source: BNP Paribas
56 “Improved visibility on iron ore supply,” Nomura Research via Thomson Research, 7 December 2011.
Global steel 2013 33 The Indian railway system suffers from a lack of adequate quality of raw materials used in steelmaking (high impurities haulage capacity and has significantly low heavy-haul freight such as alumina and silica in iron ore, high ash content and compared to its global peers. For example, Indian Railways’ variation of quality in coal) and the use of obsolete technology heavy-haul freight at 5,400 tonnes is much lower than that of (hot blast temperature below 1,000 C, lack of high top pressure other countries such as China (20,000 tonnes), South Africa operation, level of oxygen enrichment of hot blast, limited use (22,000 tonnes) and Australia (32,000 to 37,000 tonnes). Indian of agglomerated feed such as sinter and pellet) by the older Railways also suffers from inadequate infrastructure at various plants. This has affected various critical performance parameters loading and unloading terminals. The freight car turn-around for steel plants, including blast furnace productivity, coke rate, time is very slow by global standards. The effective freight energy consumption and blast furnace slag volume. The use of rates continue to carry an increased burden of subsidy toward steelmaking technologies such as FINEX and ITmk3 can make passenger traffic. good use of abundantly available iron ore fines in the country and non-coking coal for iron-making. Figure 27. Heavy-haul freight across geographies 40,000 Many Indian steel companies have adopted newer technology, and with productivity levels of around 2 to 2.8/t/day/m3, 35,000 some of their recently commissioned plants are comparable to 59 30,000 global standards. This decision has led to an improvement in consumption of raw materials and energy, as well as compliance 25,000 with environmental and pollution benchmarks such as carbon 20,000 emission norms. Tonnes
15,000 Figure 28. Performance of Indian steel plants as compared to global 10,000 parameters
5,000 Item Unit Global India steel plant benchmark 0 India US China South Africa Brazil Australia BF productivity (t/day/m3 2.5–3.5 1.5–2.5/2.8 of working Source: Ministry of Railways, India, October 2010 volume) Port facilities to catch up Coke rate (kg/t-HM) 350–400 500–600 As steel capacity in the country grows, the industry will PCI (kg/t-HM) 150–250 50–100 be increasingly dependent on domestic ports for material BF slag rate (kg/t-HM) 200–300 300–400 movement. Projected traffic handled by major and minor ports Energy (G-cal/ 4.4–5.5 6–6.5 for iron ore is expected to rise from 138 million tonnes in 2011– consumption TCS) 12 to around 245 million tonnes by 2016–17, while traffic for coal (coking and non-coking coal) is projected to increase from SMS slag rate (kg/TCS) Less than 180–200 100 163 million tonnes in 2011–12 to around 544 million tonnes in 57 CO emission (t/TCS) 1.7–1.9 2.8–3.0 2016–17. Port capacity may not increase at the same pace, as 2 there have been delays in implementing current projects, further Source: IISA as quoted in report of the working group on steel industry for the 12th FYP, limiting the ability to propose new projects.58 November 2011 Note: BF Productivity (t/day/m3): tonnes of hot metal produced per day, per cubic Adoption of modern technology meter of blast furnace volume. Coke rate/PCI (kg/t-HM): Kilograms consumed per tonne of hot metal produced. Performance parameters on technological levels and productivity Energy consumption (Gcal/TCS): giga calorie per tonne of crude steel produced. of Indian steel plants are much lower when compared to plants in SMS slag rate (kg/TCS): SMS slag consumed per tonne of crude steel. developed countries. This disparity is primarily due to the poor CO2 emission (t/TCS): tonnes of CO2 emitted per tonne of crude steel.
57 Report of the working group on port sector for the twelfth five year plan, Ministry 59 A roadmap for Research & Development and Technology for Indian Iron and Steel of Shipping, Government of India, November 2011. Industry, Ministry of Steel, Government of India. 58 “Advance ruling under indirect tax,” Ernst & Young website, www.ey.com/IN/en/ Newsroom/News-releases/Published-editorial---Regulation-and-hurdles, accessed on 20 November 2012.
34 Global steel 2013 Strategies for acceleration While some of the above are being considered by the planners and other stakeholders, more integrated and coordinated steps Despite the challenges that the Indian steel industry is going are likely to enhance the degree of certainty and stakeholders’ through, there is a major opportunity to be seized by the Indian confidence to achieve this goal. and global steel sector players. For India to be the next steel powerhouse, some comprehensive strategies would need to be Outlook adopted. Here is a brief summary of approaches: During the last few months, steel prices in India, which had been • Innovate and customize products that are relevant to latent trading at a premium to global steel prices on account of import rural demand — 70% of India’s population still has a per capita duties on steel, have corrected sharply. The correction could be steel consumption of only 13kg linked to slowing end-user demand growth in the country along • Optimize product mix to address the shifting composition with oversupply in the global arena. Going forward, the concern of steel demand for diverse applications in high-growth or over additional capacity outpacing domestic demand growth emerging sectors could become less of a concern as the active monitoring and regulation of “illegal mining activities” in major iron • Improve the logistics infrastructure to handle both inbound ore-producing states could lead to the shortage of lump ore. and outbound traffic of steel industry with growing volumes, One-third of India’s steel capacity is sponge iron, which could and in turn provide impetus to steel demand take a big hit on the sector’s margins, even leading to the • Sustain and boost stakeholders’ confidence and risk appetite closure of mills, if activity in the Indian mining industry does not of investors and lenders for sourcing the fund requirements normalize. for growth The long-term outlook for steel demand in India is quite robust • Frame a sector-level strategy on raw materials and access due to increasing demand from several sectors, including rights, to be followed by harmonization of procedures automotive, consumer durables, oil and gas, industrial machinery, real estate and infrastructure. Though there could • Assess, process and add value to iron ore to leverage availability be supply constraints in India in 2013, steel prices are likely to of grades, conserve resources for future growth and expand the remain under pressure due to a steady stream of imports. There economic benefit have been sharp increases in capacity in Korea with demand • Continue to adopt new technologies for moving up the value remaining stagnant and a slowdown in steel demand in Japan, chain, increasing efficiency and rationalizing usage of natural leading to increased exports to India, partly due to free trade capital for long-term sustainability agreements (FTAs) with these countries. However, domestic oversupply concerns may resurface during 2014–15 when all of • Improve governance practices in mining and steel businesses to the new capacity becomes operational. The new capacity in India address challenges to the social license to operate will be vertically integrated and have the ability to use fines as 60 • Form special-purpose vehicles for carefully identified zones raw material. where mega steel development can be initiated with confidence, with all key approvals in place to fast-track development of the industry
60 Indian Steel Sector Credit Suisse,17 October 2012 via Thomson One.
Global steel 2013 35 07. Other key producer countries outlook 2013
Global steel consumption trends Going forward, in 2013 apparent steel consumption is expected during 2012 indicate a tepid to pick up by 3.1% with significant rise in consumption coming in from the Middle East, Africa and Latin America. China, which is recovery. During the first nine expected to witness a 3.1% rise in apparent steel consumption, months of 2012, apparent will remain the main driving force in the growth of steel sector. global steel consumption grew EU-27, which has proved to be a laggard for last two years, could witness a minimal rise of 0.9% in its apparent steel consumption by only 1.8%. NAFTA witnessed during 2013.61 the highest growth of 7.5% y-o-y, whereas EU-27 saw Brazil apparent steel consumption Brazil’s steel industry is likely to witness some recovery in contract by 9% during the same 2013 following a series of government incentives to boost the period. sector. The most recent incentive announced in October 2012 is raising the import tariff, which will increase the volume sold in the Brazilian domestic market as well as promote recovery in local steel prices. During the first eight months of 2012, imports accounted for around 15% of Brazil’s total apparent consumption; this is likely to drop significantly due to import tariff increases that take effect in October 2013. Other measures, such as a drop in electricity prices, the infrastructural/logistics package Sangwook Choo announced by the government, and events such as the World Cup Partner, and the 2016 Olympics Games, will support the recovery of steel Mining & Metals, 62 Ernst & Young Korea demand in Brazil from 2013. “The slump in the Korean shipbuilding industry and construction activities could lead to a decline or slow growth in demand for steel products.”
61 EUROMETAL outlook on economies and steel markets, November 2012. 62 “What went wrong? Metals and Mining,” Votorantim Corretora, 22 October 2012.
36 Global steel 2013 Europe (EU-27) therefore is very much dependent on exports for the growth of its steel industry. A large proportion of its steel exports go Most of the countries in the EU witnessed contraction in steel to Korea and China. As a result, 2013 could become a difficult usage during 2012. It was not only the debt-ridden countries, year for the country’s steel sector as growth in both of these such as Spain and Italy, that experienced a decline in apparent countries takes time to recover. During the year, Japanese steel consumption, but also resilient countries such as Germany. steelmakers are likely to witness challenges due to reduction in The apparent steel use in Spain and Italy in 2012 is expected to margins, an oversupply of steel and challenging global economic fall by 11.9% and 12.6%, respectively, whereas Germany could conditions.64 It is unlikely that Japanese steelmakers will expand register a decline of 4.7%. Although the economic environment into mining operations, but they are far more likely to look to in Europe deteriorated in 4Q12 due to continued uncertainty, mergers and acquisitions as well as cost reduction activities to we expect a gradual improvement in 2013. Currently, economic improve their competitive position. In addition, they are likely to growth is uneven among major European countries, and steel look to enhance corporate value by expanding downstream into demand continues to be depressed. The stimulus packages in areas such as cold-rolling, galvanizing processes and coil centers, major global economies, along with measures from the European possibly in conjunction with trading houses. Central Bank to contain the debt crisis, are likely to moderately 63 improve steel demand in the EU during 2013. Russia According to the EUROMETAL outlook on economies and steel Considerable investment in infrastructure and construction, market, the apparent steel consumption in EU-27 is expected to particularly sports venues, will continue to drive steel demand rise by 1% during 2013.Sectors such as mechanical engineering, in Russia in 2013, registering an expected growth of 5% y-o-y. domestic appliance and metal wire and goods are expected to Russia consumes only 60% of its steel production domestically contribute positively to EU steel demand, whereas the main steel- and therefore remains a net exporter of steel. The Russian consuming sectors such as construction and automotive, which steel sector is highly consolidated, with the top five companies contribute 38% and 16% respectively to EU steel consumption, accounting for roughly 75% of the country’s production. This could continue to shrink even in 2013. consolidation will help maintain the production discipline needed to maintain steady growth of the steel industry through 2013.65 Japan The steel sector is witnessing a slowdown due to weak domestic demand and a sluggish economy. Japan consumes only 60 million tonnes of its 110 to 120 million tonnes produced and
63 World Steel. 64 Industry Forecast — Steel: Falling Margins to Weigh On Investment, BMI. 65 Industry Forecast — Steel: Consumption in Infrastructure to Drive Sector, BMI.
Global steel 2013 37 South Korea United States The steel sector in South Korea is unlikely to show any The economic data from the Purchasing Managers Index improvement in 2013. The sharp correction in steel prices is (PMI) and recovery in the US residential construction gave an a result of capacity oversupply and excess inventory in the encouraging picture in the beginning of 2012. However, steel system. Although the steel prices, which are trading near end- consumption did not pick up as expected during the second half 2008 levels, seem to have limited downside, the slowdown in of the year, mainly due to low growth in US economy. Going major steel-consuming industries does not support an increase into 2013, a key uncertainty remains regarding how the US will in steel prices from the current level. A 13% y-o-y decline in handle tax reforms and spending cuts. Though the best case new orders for the Korean shipbuilding industry could lead to scenario is a slight improvement in steel demand in the US with a a fall in heavy plate consumption in 2013. On the long product GDP growth of 2.5%, if Congress is unable to reach a compromise side, a persistent property market slump indicates a decline in on tax reforms, it could lead to market uncertainty and economic private investment, leading to a slowdown or decline in long steel disruptions.67 products in the country. Moreover, despite poor demand, Korean New EPA rules are also going to have an effect on the steel steelmakers have continued to expand their supply, leading to a sector — particularly those supplying to the automotive industry. 3% y-o-y rise in steel production during 1H12. Although this pace Vehicles will have to be lighter, and therefore there is the threat of production expansion is slow, it is still enough to worsen the of aluminum or plastic substitution. oversupply situation.66
66 “Structural downturn,” Mirae Asset Securities, 22 October 2012, 67 Economic and Steel Market Outlook 2012–2013, EUROFER. via Thomson One.
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Global steel 2013 39 Ernst & Young
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